Last updated: August 8, 2014 5:15 pm

Gold climbs as Middle East violence flares

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A combination of sectarian violence in Iraq and geopolitical tensions in the Middle East and Ukraine helped gold break through $1,300 a troy ounce to register its first weekly advance in a month.

Bullion gained around 1.3 per cent over the week and hit a three and half week high of $1,320 on Friday after President Barack Obama authorised the use of air strikes to halt the advance of Islamic State of Iraq and the Levant (Isis) insurgents.

Gold later pared gains to trade at $1,310. In the year to date, the precious metal has gained around 9 per cent, outpacing silver (2.6 per cent) and platinum (8 per cent) but lagging palladium (18 per cent).

“We don’t ascribe [the recent advance] that to one particular event or headline, rather to several small streams of unease reaching a confluence during reduced summer liquidity,” said Tom Kendall, analyst at Credit Suisse in a report.

Mr Kendall pointed to disappointing economic data in Europe, renewed concerns about the property market in China as well as continued uncertainty about the post-tapering intentions of the US Federal Reserve as other factors helping to support gold.

Trader said lower US Treasury yields had provided a further prop. Returns on bond yields are closely followed by the gold market because bullion pays no interest.

Geopolitical concerns have helped the support price of gold on several occasions this year, most notably in June when Isis swept across larges swaths of northern Iraq.

However, the gains have proved difficult to sustain. Analysts believe the latest advance is unlikely to be any different.

“Quite simply, gold is consistently failing to attract investor interest, outside of intraday speculative activity,” said UBS analyst Edel Tully in a note to clients.

“Exchange traded flows are very minor, physical demand is barely existent and a safe haven bid has proven sporadic and lacking sizeable volumes.”

Ms Tully noted trading volume on New York’s Comex so far this month had been 27 per cent below the year’s average.

Mr Kendall said physical demand for gold, both from investors and jewellers, was currently weak.

“In part, that is due to seasonality but also due to persisting disinterest from investors of most types in western markets but also in China.”

Holdings of bullion in gold backed exchange traded funds has declined by around 850,000 ounces since the start of the year while Chinese gold demand dropped by nearly a fifth in the first half of 2014 from a year ago as consumer interest in bullion bars and coins waned.

Recent figures from the China Gold Association (CGA) showed that demand from January to June totalled 569 tonnes, a 19 per cent dip from the 706 tonnes consumed during the same period in 2013.

Soaring purchases by retail consumers saw China overtake India as the world’s largest gold consumer last year.

However, some analysts believe the country’s appetite for gold may have been overstated.

A recent report by the World Gold Council said Chinese companies may have accumulated up to 1,000 tonnes of gold for use as collateral in financing deals rather than to meet consumer demand in recent years.

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